IRS Tips Hand on Top-Heavy Audit Triggers

May 27, 2004 ( - The Internal Revenue Service (IRS) has provided plan sponsors a "cheat sheet" of audit triggers following the closure of 45,000 examinations of employee plans over the past four years.

>The most common triggers of an employer sponsored retirement plan audit were top-heavy plans and plans with large numbers of similar transaction types, said Catherine Jones, the IRS employee plans mid-Atlantic manager, Tax Exempt/Government Entities.   Speaking at a conference sponsored by the American Society of Pension Actuaries and the IRS this week, Jones provided conference attendees with the top five things that triggered audits, according to Washington-based legal publisher BNA.

>The top five list includes:

  • largenumbers of separated participants with less than 100% vesting;
  • largepercentage of assets classified as “other assets;”
  • largedistributions on income statements;
  • top-heavySection 401(k) plans;
  • top-heavyplans covering self-employed individuals.

Additionally, according to the report Jones said the IRS began a round of limited scope, or “focus” audits, this March covering approximately 1,000 plans.   The pilot exams are looking into five market segments:

  • health-care and construction defined benefit plans;
  • manufacturing money purchase plans;
  • finance and insurance plans under Section 401(k);
  • profit sharing plans for other services.

Currently being conducted in Connecticut, New Jersey, Pennsylvania, and Tennessee, Jones said auditors will look at a number of different issues and if problem is detected, the focus audit might then be expanded into a full-blown affair.  

>The latest round of focus audits is an expansion of initial rounds that focused on large cases, Sections 403(b) and 457 plans, and multiemployer plans.   Looking forward,   the IRS is also planning audit pilots that will include:

  • insurance funded “springing cash value plans”;
  • abusive employee stock ownership plans pilot program;
  • cases that are referred by either complaints from participants or the Department of Labor;
  • tax shelters and annuities under Section 403(b) and 457.

The team audit pilot became a permanent IRS program in October 2003.